How Founders Can Protect Wealth Before a Liquidity Event: A Hypothetical $5.8M GRAT Transfer

Before a business sale or major funding round, you may be thinking about what the money could mean for your family. Part of that decision is how much to keep for your own future and how much you would like to pass to the next generation.

A Grantor Retained Annuity Trust, or GRAT, is one option to discuss with your estate attorney for transferring future growth to family. The example below shows how the timing of that growth and the required payments can affect what remains for your heirs.

How a GRAT works

You transfer shares into an irrevocable trust for a fixed term, often two years. The trust owes you specified annuity payments, and anything remaining at the end passes to the beneficiaries under the trust's terms.

In a “zeroed-out” or nearly zeroed-out GRAT, the payments are designed so their present value roughly equals the value you contribute, using the applicable IRS valuation rate. This can make the initial taxable gift very small. What remains for your family depends on how the investments perform and when the payments are made.

The qualified annuity-interest rules govern the payment structure. The IRS Section 7520 table gives the applicable monthly rate.

Hypothetical case study: shifting about $5.8M to heirs

The following is a hypothetical example. A founder contributes $2 million of shares when the company is valued at $5 million. The illustration assumes the appraised share value rises fourfold before the first annuity payment at the end of year one, then stays unchanged through the second payment at the end of year two.

Rather than waiting for that increase, the founder's advisors set up a two-year GRAT:

• The transfer: A qualified appraisal establishes the $2 million contribution value.
• The payments: At a 5.60% valuation rate, two equal year-end payments of approximately $1,084,763 each have a present value of approximately $2 million.
• The shares: Payments are made in shares at their appraised value when distributed. The first payment removes shares from the trust, so those shares no longer participate in its later results.
• The assumptions: The calculation ignores legal, appraisal and administration costs, income taxes, dilution and other changes to the share count.

This produces approximately $5.8 million for the remainder beneficiaries under the stated assumptions and a properly structured GRAT. Growth occurring after the first payment would leave a different result, because more shares would have been required to make that earlier payment at the lower valuation.

If the remainder stays outside an estate otherwise taxed at the 40% federal estate-tax rate, the illustrated $5,830,474 remainder corresponds to approximately $2.3 million of gross federal estate-tax difference, before costs and other tax effects. The federal basic exclusion amount is $15 million per person for 2026; future exclusion amounts and the estate's actual exposure need their own review. See the IRS's 2026 inflation adjustments.

What to discuss before a business sale

Start with what the transaction could mean for your family, then bring the investment, legal and tax questions together.

• Your own financial needs: Consider the cash, retirement income and investments you want to retain before deciding what to transfer.
• The business and expected transaction: Give your attorney and appraiser a complete picture of the company, potential deals and expected milestones.
• Payments and coordination: Ask how the required trust payments would be funded and how your estate attorney, CPA, appraiser and investment adviser would work together.

Risks and costs to weigh

• You must outlive the term: If you die before the GRAT ends, the assets are generally pulled back into your estate.
• Performance and payments matter: Insufficient growth can leave little or nothing for beneficiaries. The timing of gains and the assets used to fund payments affect the outcome.
• Setup costs: Legal fees, a qualified appraisal at funding and for each in-kind payment, and trust administration are paid whether or not the GRAT succeeds.
• No step-up in basis: Your heirs receive your original cost basis in the shares, so they may owe capital gains tax when they sell. If the shares are qualified small business stock, gifted shares generally keep their QSBS status, which deserves its own review.
• Income tax stays with you: A GRAT is usually a grantor trust, so you pay the income tax on its earnings during the term.

For a broader checklist, see Planning for a Liquidity Event: Steps to Take Before and After.

Plan for your own next chapter, too

Passing wealth to family is one part of the decision. You also need to consider what to keep for your own cash needs, retirement and other priorities. Todd can help you evaluate concentrated holdings, plan reserves and build a diversified investment portfolio around those goals.

Your estate attorney, CPA and appraiser can handle the trust, tax and valuation work. To discuss how your investments could support life after a business sale, schedule an introductory meeting with Todd.

This is a hypothetical case study provided for educational purposes only. It is intended to illustrate how a GRAT can work and does not represent the experience of any actual client. Figures are rounded and assume a two-year GRAT funded in October 2026 at a 5.60% Section 7520 rate, equal year-end payments, a fourfold appraised share-value increase before the first payment and no further growth before the second, a 40% federal estate-tax rate, and an estate above the applicable exemption. Costs, income taxes and dilution are not modeled. Actual results depend on valuations, interest rates, tax law, and individual circumstances, and are not guaranteed.